Federal Reserve officials are worried that the economy is at greater risk of a fallout from higher tariffs and the possibility of a trade war, according to notes released Thursday.
The report from the Fed’s most recent monetary policy meeting revealed that most officials believed that “uncertainty and risks associated with trade policy had intensified” and could hurt business confidence and investment.
Fed officials across the country have been hearing more from business executives that they are planning to scale back projects as President Trump has sought punitive tariffs on trade partners and other countries have retaliated, the notes indicated. In particular, steel and aluminum producers and farmers are worried.
[Also read: Trump forges ahead on China tariffs despite business backlash]
Despite worrying about trade policy, though, Fed officials viewed the economy as “very strong” overall, and strong enough to justify further monetary policy tightening.
Thursday’s peek into Fed officials’ thinking came from the minutes to their most recent meeting on June 12-13.
Following that meeting, Chairman Jerome Powell repeatedly told the press in unusually unguarded terms that the economy is “in great shape.”
In that press conference, Powell downplayed the immediate dangers of trade war, noting that there are not yet signs in the data that the threat of tariffs are hurting businesses.
“We really don’t see it in the numbers. It’s just not there,” he said. “So, I would put it down as more of a risk.”
Powell and the monetary policy committee voted unanimously at that meeting to raise their target interest rate by a quarter percentage point to between 1.75 percent and 2 percent. Fed officials have said that higher interest rates will be needed, thanks to the improving economy, to keep spending growth stable and inflation around target.
On both scores, the Fed seems to be doing very well in recent months. Inflation appears to be solidifying at the Fed’s 2 percent target, after falling short for the better part of a decade. And unemployment, at 3.8 percent in May, is the lowest it has been since the late 1960s.
The remaining challenge for the Fed is planning for removing the crisis-era programs it still has in place. Members have to guess where their interest rate target should head over the next few years, and also figure out the endgame for shrinking the central bank’s balance sheet that has been swollen by large-scale purchases of government bonds. Thursday’s minutes showed that Powell and company talked over the possibility that they could be done raising interest rates as soon as next year, as the short-term interest rate finally aligns with what they see as consistent with a healthy economy in the long-run.
In the meantime, Fed officials are watching out for a few potential threats to derail the recovery, including that of a trade war.
Another problem that came up in the meeting is a good one to have: Companies are increasingly complaining that they are having trouble finding and keeping workers. With unemployment at 3.8 percent, more executives are reporting difficulties in hiring, and many are training up less-qualified workers or investing in automation, according to the minutes.
Over time, the Fed would expect the low supply of workers relative to jobs to translate into higher wages and salaries.
